China Secures Turnaround

Inflation in China quickened in December, with the Consumer Price Index (CPI) rising to 2.5 percent, up from the 2.0 percent registered in November (see Chart 1). China's coldest winter in almost three decades is raising inflation fears due to spikes in food and energy prices. Lower-than-average temperatures in both north and south China are prompting higher demand for natural gas and disrupting agricultural production. The Chinese Government is currently moving to contain rising produce prices by lowering power and distribution costs for vegetable producers and transporters, releasing vegetable reserves and calling on companies to maximize gas output and raise imports. Factory gate prices continued their momentum, as the Producer Price Index (PPI) fell by 1.9 percent in December, easing from November's 2.2 percent drop (see Chart 2).

Manufacturing holds steady

Activity in China's manufacturing sector remained in expansionary territory for the third consecutive month in December, as the official Purchasing Managers' Index (PMI) was unchanged at 50.6 from November (see Chart 3). A reading above 50 indicates an expansion in manufacturing activity while a reading below 50 indicates contraction. The latest PMI reading points to steady growth ahead and a positive start for the economy in 2013. However, the recovery remains unbalanced with output in the oil processing, quarrying and tobacco industries slipping while output in the food processing, auto manufacturing, textiles, steel and electronics industries expand. 

Consumption, trade pick up speed

Retail sales, one of the country's key economic indicators, rose 15.2 percent in December from a year earlier, accelerating from 14.9 percent in November and matching its fastest pace in all of 2012 (see Chart 4). Retail sales for 2012 increased 14.3 percent to $3.3 trillion, 2.8 percentage points less than that in 2011. Meanwhile, China's trade surplus rose sharply in December to $31.6 billion from $19.6 billion in November on unexpectedly strong exports. Imports grew by 6 percent to reach $167.6 billion (see Chart 5) while exports rose 14.1 percent to reach an all-time high of $199.2 billion (see Chart 6). Overseas shipments increased 14.1 percent year on year, the highest increase since May. China's exports are set to recover as long as conditions in the world economy continue to improve. A rebound in trade may give China's new policymakers more time to shift the economy toward domestic consumption to sustain expansion.

Economy officially turns the corner

China's economic growth accelerated in the fourth quarter of 2012, largely settling a debate about whether or not China would experience a hard or soft landing after a more than two-year slowdown. The country's gross domestic product (GDP) rose by 7.9 percent year on year in the fourth quarter, up from 7.4 percent growth in the third. Overall, GDP growth cooled to a 13-year low of 7.8 percent in 2012, exceeding Beijing's official 7.5-percent target for growth but nonetheless marking a significant deceleration from 9.3 percent growth in 2011. China's GDP growth is likely to stabilize at around 8 percent in 2013, a relatively robust pace compared to other large economies.